A short driveway in West Bellevue ends abruptly in a barren, sunken lot, the consequence of a Bremerton bank’s strategy of lending based on little more than grandiose plans for megamansions.

In 2007, Westsound Bank gave Pavel Maslov, an electrician in Kent, a $2 million loan to buy the property, remove an old bungalow and construct a 4,500-square-foot home with a three-car garage. Maslov’s contractors demolished the structure without a permit and broke an underground line, sending flammable gas into the house next door.

“They almost blew up the neighborhood,” said Nancy Leigh, a longtime resident.

This is Westsound’s legacy in King and Pierce counties: From 2005 to 2007, a rogue loan officer at the bank’s Federal Way branch made at least 120 home-construction loans totaling $118 million to amateur Russian and Ukrainian homebuilders like Maslov, federal officials say.

Those loans crippled the Pacific Northwest’s fastest-growing bank, and the Federal Deposit Insurance Corp. took control of Westsound in May 2009 at a loss of more than $100 million.

Nearly four years later, few have been held accountable. But more details have emerged about how the federally insured bank was allegedly looted.

Two weeks after regulators shut down Westsound, a federal grand jury indicted Aleksandr Kravchenko and his wife, Galina, on charges of bank fraud and money laundering using Westsound loans. Prosecutors added tax evasion charges a year later.

The indictment, unsealed only this past May, charges Kravchenko and his wife with leading a criminal conspiracy to defraud Westsound Bank and recruiting unqualified borrowers who obtained 55 loans worth at least $49 million. The Kravchenkos diverted at least $1 million in proceeds, prosecutors say.

Teresa Feller, later identified as the Westsound loan officer who enabled the unqualified borrowers to obtain tens of millions, denies wrongdoing and has not been charged with any crimes. She declined to comment for this story.

Kravchenko was no stranger to Westsound’s leadership: The bank’s loan committee approved millions in real-estate loans to him and his companies, the FDIC alleged in a civil lawsuit filed in 2011 against the bank’s former directors and officers.

The Russian lending program was part of a wider strategy by Westsound’s leaders to grow fast in anticipation of the bank’s initial public offering in 2006, the FDIC alleged.

Warnings from regulators in early 2007 to pay closer attention to risky lending at the Federal Way branch were ignored by the bank’s officers and directors, alleged the FDIC.

About half of the 120 suspect loans were stated-income loans, which didn’t require borrowers to prove their income. Other loan files lacked signed tax returns. All had “alarmingly high rates of default,” the FDIC said.

Fraud scheme

In April 2005, Westsound hired Feller, an experienced loan officer, to manage its new Federal Way mortgage branch.

Feller, the FDIC later alleged, colluded with Kravchenko, appraisers and borrowers to file false and unverified loan applications. And thanks to the bank’s compensation structure, the FDIC said, she made more than $1 million in commissions during the two years she worked there.

Some of them believed Kravchenko worked for Westsound: They’d call the Federal Way branch, ask for him and be connected to him at the desk he had there, the FDIC alleges. He also translated for borrowers who visited the branch.

Here’s one example of how the fraud worked, according to the indictment:

Kravchenko’s company signed an agreement to buy a property in Auburn for $470,000, assigned his interest to one of his recruits and helped him apply to Westsound for a $1.2 million home-construction loan.

The borrower claimed he earned $22,000 a month, had $200,000 in assets, and planned to live in the house. These were all lies, prosecutors say, as were the tax returns for the previous two years that he submitted to the bank.

Through a go-between, Kravchenko passed $69,500 to the borrower, who deposited it in a personal bank account at Bank of America. Westsound approved the loan after verifying that account. Once the loan closed, Kravchenko received a “development fee” of $10,000, and his wife, a real-estate agent, got a $29,311 commission on the sale.

The house was never built, county records show. (In 2010, the FDIC sold the property to an investor for $350,000.)

The suspect loans were often based on hasty appraisals that supported inflated loan amounts. The bigger the loan, the bigger the bank’s fees were.

“A good appraiser to Westsound was anyone who could make value,” said Richard Hagar, who owns American Home Appraisals in Mercer Island and has looked at some of the appraisals ordered by the bank. “Westsound would not review these appraisals, and even when they did review them, it was a terrible, terrible appraisal.”

In some cases, where a plan called for a 7,000-square-foot house, the final house ended up only 4,600 square feet. Or, like Maslov’s property, no house was built.

The bank didn’t monitor the loans or even see if construction was on track. Borrowers used loan funds to write checks to car dealerships, credit-card companies, private schools and department stores, the FDIC alleges.

Westsound told its shareholders that a committee would review all loan requests over $100,000. But virtually none of the Russian loans got that review.

That’s because starting in April 2005, the bank’s directors and executives informally delegated oversight for home-construction loans to the very mortgage underwriters and loan officers who received commissions on such loans, in violation of the bank’s stated policy, the FDIC alleges.

The bank was betting on commitments from mortgage giants like Countrywide Financial to buy these loans and move the risk off the bank’s books. But there was no payoff to Westsound without a finished home.

Brett Green, the bank’s executive vice president of sales and lending, allowed Feller to improperly use an automated underwriting system and commit the bank to the risky loans without review, the FDIC alleges.

Feller denies having entered any information into that system and said the loans were approved by the bank’s underwriting department or the bank president.

“My actions were always open and transparent and the Bank president and board knew we were working with this community, no secrets,” Feller wrote to the FDIC.

Like Feller, Green received incentive pay based on the mortgage division’s business: As Westsound’s highest-paid executive, Green made $300,000 in salary and $350,000 in bonuses in both 2005 and 2006.

In early 2007 state and federal examiners met with Westsound’s board and criticized the high volume of stated-income construction loans coming out of the Federal Way branch.

The bank let Feller continue making loans from March to August, when state regulators went to investigate a tip from the community about potential wrongdoing at the branch. By then, another 20 construction loans totaling $30 million had gone out the door to unqualified Russian borrowers.

The bank fired Feller. But it was too late.

On Sept. 21, citing the slowdown in the mortgage market, Westsound laid off most of the employees in its mortgage division, including Green.

Regulators later discovered that the Federal Way branch’s loans to Russian and Ukrainian borrowers represented more than 80 percent of the bank’s troubled loans.

The bank had to set aside $13.3 million — about one-fifth of its capital at the time — just to restore its loan-loss reserves to an adequate level.

Johnson left the bank the following March, just before regulators slapped Westsound with a cease-and-desist order that required the board to bring in an experienced CEO and chief lending officer.

But the new CEO inherited a rapidly deteriorating loan portfolio, and came in as real estate values were beginning what became a swift decline.

By one estimate, 30 percent of the homes financed by Westsound in King and Pierce counties were never completed or even started. The bank wrote off tens of millions of dollars in bad loans and was left with demolished lots, skeletal frames of unfinished houses and finished mansions that nobody could afford.

On May 8, 2009, state and federal regulators shut Westsound down.

Shareholders across the country, from local business boosters to the Detroit firefighters’ pension fund, took a bath.

Epilogue

Last year, the FDIC banned Feller from working for any federally insured bank.

The agency also recently settled its suit against Green, Johnson and the directors for $1.73 million. They admitted no wrongdoing and all the expenses were picked up by the bank’s insurer.

According to two sources, the Kravchenkos fled to Moldova, an Eastern European nation which does not have an extradition agreement with the U.S. The Justice Department won’t comment on the couple’s whereabouts, but confirmed they are international fugitives.

Maslov couldn’t be reached for comment. But in July 2011 he was allowed to do a short sale on the Bellevue lot he bought four years earlier with $1.1 million of Westsound’s money.